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National Budget To Add Further Impetus To Economic Growth

The Reserve Bank of Fiji has released its July 2018 economic  review The global growth prospects for 2018 remain unchanged as noted by the International Monetary Fund in its World
04 Aug 2018 10:00
National Budget To Add Further Impetus To Economic Growth

The Reserve Bank of Fiji has released its July 2018 economic  review

The global growth prospects for 2018 remain unchanged as noted by the International Monetary Fund in its World Economic Outlook.

However, the downside risks to the global outlook have increased due to the escalation of the United States (US) trade tensions and the higher possibility of tightening in global financial conditions.

For Fiji’s trading partners, the US economy continues to strengthen backed by fiscal stimulus while the Euro Zone and Japan growth forecasts have been lowered as economic activities softened in early 2018.

Amongst other emerging market and developing economies, the growth outlook for China moderated led by tightening financial conditions while India’s growth forecast was revised downwards due to the negative impact of oil prices increase on domestic demand.

There were mixed movements in June for global commodity prices, as gold, food and sugar prices fell while crude oil prices edged further upwards.

The crude oil price rose over the month in June due to supply shortages.

Oil price futures indicate that prices will average around US$75.27 (FJ$157.77) per barrel for the September-November 2018 period which is higher than the price noted at the end of 2017.

Gold prices fell in June mainly due to the lack of demand following expectations of US interest rate hikes.

The trade war tensions caused global food prices to fall while higher production pushed sugar prices down.

 

Domestic movements

Domestically, the expansionary fiscal year (FY) 2018-2019 National Budget announced on 28 June will add further impetus to economic growth this year and the next.

The FY 2018-2019 net deficit is $414.2 million, equivalent to 3.5 per cent of Gross Domestic Product (GDP).

This will emanate from the budgeted Government revenue of $4,236.4 million (36.3 per cent of GDP) and Government spending of $4,650.6 million (39.8 per cent of GDP).

Consequently, Government debt is expected to increase to $5,583.2 million at the end of July 2019, equivalent to 47.8 per cent of GDP.

Sectoral performances have been positive with increases noted in visitor arrivals, gold, and timber production.

 

High arrivals

Visitor arrivals increased by an annual three per cent to 383,982 visitors cumulative to June, as arrivals were higher from the US, New Zealand, Continental Europe, China, India, Hong Kong, Rest of Asia and Pacific Islands.

 

Gold, oil and fish

Gold production noted a turnaround (+11.6 per cent) cumulative to June, from the annual decline (-18.1 per cent) in the same period in 2017.

Over the same period, mahogany production (4,618 cubic metres from 384 cubic metres), sawn timber (14,283 cubic metres from 7,073 cubic metres), and wood chip production (168,676 tonnes from 41,707 tonnes) noted higher annual increases from the comparable period in 2017.

In contrast, fish production declined in the year to May (-15.6 per cent), compared to a strong growth (+46.6 per cent) in the same period in 2017, attributed to lower fish catch.

 

Consumer spending

Strong aggregate demand, particularly consumption spending continues to support the Fijian economy.

Both new (+47.6 per cent) and second hand (+8.8 per cent) vehicle registrations grew in the year to June together with higher consumption-related credit (+19.0 per cent).

The turnover from wholesale and retail trade also rose on an annual basis (+4.0 per cent) cumulative to March.

 

Disaster rehabilitation

Furthermore, Government spending on disaster rehabilitation programmes post-April floods is anticipated to provide further boost to the wholesale and retail activity in the second and third quarters of 2018.

Going forward consumption activity should remain robust given the accommodative monetary policy and various incentives and policies announced in the FY 2018-2019 National Budget.

 

Investment

On the investment front, annual declines were recorded for domestic cement sales (-20.6 per cent) and new commercial banks’ lending for investment purposes (-8.0 per cent) cumulative to June.

On a positive note, increases were noted in the number (+2.2 per cent) and value (+26.9 per cent) of building permits in the year to March, which provides some indication of expected improvement in construction activity in the coming months.

 

Capital spending

Looking ahead, post disaster rehabilitation works, increased capital spending by Government and investment initiatives announced in the FY 2018-2019 National Budget is likely to spur investment and construction related activities in the medium term.

 

Labour market

Labour market conditions continue to remain positive as indicated by the RBF’s Job Advertisement Survey.

In the year to June, the total number of vacant jobs advertised in both the Fiji Times and the Fiji Sun increased by an annual 8.2 per cent led by the manufacturing; community, social & personal services; electricity & water; transport, storage & communication and the mining & quarrying sectors.

 

Trade deficit

The merchandise trade deficit widened by 12.3 per cent to $1,065.2 million, cumulative to April, compared to a 38.3 per cent widening in the same period a year ago.

Total exports (excluding aircraft) rose by 7.5 per cent to $602.8 million, underpinned by the higher exports of woodchips, gold, chemicals and other re-exports which more-than-offset the decline in exports of mineral water, sugar, molasses, cement, garments and re-exports of fresh fish.

On the other hand, total imports (excluding aircraft) rose by 10.5 per cent to $1,668.0 million due to increased imports of machinery and transport equipment, mineral fuels, chemicals, crude materials, foods & live animals and beverages and tobacco which more-than-offset the decline in imports of manufactured goods.

Tourism earnings increased by 4.7 per cent on an annual basis to $358.2 million in quarter 1 2018, compared to the same period in 2017.

This outcome is mainly led by higher earnings from the US.

 

Remittances

Cumulative to May, personal remittances rose by 8.5 per cent compared to a decline a year ago (-4.6 per cent).

The growth in inward remittances was contributed largely by gifts and maintenance inflows in the review period.

Financial conditions remain conducive to the outlook for domestic growth.

The growth in private sector credit remained positive albeit slower in June (+7.5 per cent) compared to May (+7.8 per cent), led by the lower outturn in commercial banks’ lending.

Despite some upticks, interest rates were still at relatively low levels in June, given the heightened competition and ample liquidity in the banking sector.

However, commercial banks’ new lending rate rose over the month to 6.28 per cent from 5.94 Per cent in May.

Within the same period, funding costs dropped as indicated by the decline in new time deposits rate from 3.13 per cent to 2.93 per cent in June.

 

Excess liquidity

Excess liquidity in the banking system (measured by commercial banks’ demand deposits with RBF) fell in June by 9.9 per cent (-$51.4m) to $470.2 million, led by a fall in foreign reserves (-$22.9m) coupled with an increase in Statutory Reserves Deposits (+$4.7m) and currency in circulation (+$7.9m).

As at July 27, liquidity remained adequate at $482.3 million.

The Fijian dollar (FJD) strengthened against the Australian (1.5 per cent) and the New Zealand dollars (1.1 per cent) in June, but weakened against the US dollar (-1.7 per cent), the Euro (-0.8 per cent) and the Yen (-0.5 per cent).

The average monthly movement of the FJD was reflected in the Nominal Effective Exchange Rate (NEER)2 index which rose over the month in June (+1.1 per cent) indicating a stronger domestic currency.

The Real Effective Exchange Rate (REER)3 index also increased (+2.6 per cent) as domestic prices were higher relative to trading partners in June.

The annual headline inflation moderated to 4.6 per cent from 5.1 per cent in May.

In June, higher prices were noted for yaqona, tobacco and alcohol.

 

Decline in prices

However, over the month, consumer prices fell by 0.8 per cent attributed to decline in prices of fruit and vegetables indicating normalised supply after the natural disasters in April.

Inflationary outcomes continued to be driven by both domestic and external factors with more pressure expected from the rise in crude oil prices combined with the impact of duty increase on alcohol and tobacco announced in the FY 2018-2019 National Budget.

As such, the 2018 year-end inflation forecast has been revised upwards to five per cent, from the three per cent projected earlier.

Foreign reserves (RBF Holdings) fell over the month of June to $2,139.9 million, sufficient to cover 4.9 months of retained imports of goods and non-factor services (MORI).

As at July 31, foreign reserves were $2,164.6 million, sufficient to cover five MORI and are expected to remain at comfortable levels for the remainder of the year.

Feedback:  maraia.vula@fijisun.com.fj

 

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